DP3727 Environmental Policy and Capital Movements: The Role of Government Commitment

Author(s): Laura Marsiliani, Thomas I Renström
Publication Date: January 2003
Keyword(s): capital movements, environmental policy, human capital, income inequality, politico-economic equilibrium, time-inconsistent fiscal policy
JEL(s): F20, H21, H23
Programme Areas: Public Economics, International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=3727

This Paper explores the relationship between environmental protection and international capital movements, when tax policy is endogenous (through voting). A two-period general equilibrium model of a small open economy is specified to compare the effects of two different constitutions (commitment or no commitment in tax policy), as well as income inequality. Under the commitment regime, the equilibrium is characterized by a lower labour tax, higher environmental tax and less capital moving abroad than in the no-commitment equilibrium. Furthermore, given the degree of commitment, more equal societies are characterized by tougher environmental policy and less capital moving abroad.